US should let AIG fail?: McCain September 19, 2008

Republican presidential nominee John McCain called for a commission to study the crisis in US financial markets like the one that investigated the September 11 attacks and said the government shouldn’t rescue insurer American International Group Inc

“We need to set up a 9/11 Commission in order to get to the bottom of this and get it fixed and act to clean up this corruption,” McCain said in an interview on CBS’s “Early Show.”

In a series of six satellite interviews from Miami this morning with TV talk shows, McCain previewed the themes he will sound at rallies in Tampa, Florida, and Youngstown, Ohio, today.

The spreading market turmoil is taking center stage in the campaign as AIG, the biggest US insurer by assets, is seeking capital to stay afloat, Lehman Brothers Holdings Inc filed for Chapter 11 bankruptcy protection and Bank of America, the biggest US consumer bank, took over Merrill Lynch & Co.

The Arizona senator said on NBC’s “Today” show that taxpayers should not be “on the hook” for AIG, which may be on the verge of collapse. He praised Treasury Secretary Henry Paulson for denying requests for a bailout, saying Paulson “has been correct” in asserting taxpayers aren’t responsible for business failures.

Harvard economics Professor Martin Feldstein, whose advice has been sought by McCain, is on the board of directors of AIG.

Assessing the Economy: McCain economic adviser Doug Holtz-Eakin said separately that the candidate is sticking to his assertion that parts of the economy are sound. Democratic candidate Barack Obama has derided McCain’s repeated statements that the fundamentals of the economy are strong.

“You shouldn’t run for president by running from everything in sight and trying to scare people,” Holtz-Eakin told reporters in Miami.

AIG fell 61 per cent in New York trading after its credit ratings were cut in the latest tremor to shake the global financial industry. The New York-based insurer is seeking as much as $75 billion in loans.

“There are great efforts being made to try to raise sufficient capital to keep AIG in business,” McCain said in an interview with CNBC. Taxpayers shouldn’t be held responsible for the bad performance of US institutions and “the moral-hazard issue is something that we have to take head-on,” he said.

The idea of moral hazard is that bailouts encourage additional risk taking. It has been applied particularly to the insurance industry where coverage against a loss might increase risky behaviour.

Closer Regulation: The Republican nominee and Obama, an Illinois senator, have been calling for more regulation as the financial crisis spreads.

The government must make a commitment to the American people that “we will fix this and it will never happen again,” McCain, 72, said today in his TV interviews.

Regulatory agencies that were designed in the 1930s should be consolidated to improve transparency and regulation of markets in a “global, instantaneous economy,” he said.

“There is a risk of overregulation and overreacting,” McCain added. “Congress has a tendency to do that, but to say this is just a blip on the radar — this is serious.

This isn’t just going to cost jobs on Wall Street; this is going to cost jobs all over America.”